Tat Hong Holdings -
Hope and despair
3QFY3/14 core net profit was ahead of expectation at 30% of our full-year forecast. The higher numbers arise after taking out negative FX effect and various one-off items. The same goes for 9MFY3/14 core net profit that formed 91% of our FY13 estimate. We raise our FY14 EPS by 8% to reflect these non-core items, while lowering FY15-16 estimates by 16-17% to reflect rental rates adjustments. Thus, our target price is now lower - still based on 7x CY15 P/E, 1 s.d. below its 5-year average forward P/E. Strictly speaking, TAT has turned around from five quarters of low profitability. However, uncertainties in Australia will eclipse its other growth engines and hinder better valuation multiples as seen in the past. We maintain our Hold call.
The best quarter so far in FY14
The 19% yoy decline in revenue in 3Q14 was not a surprise. Except for the tower crane rental segment, all of its divisions posted lower revenue. Reported profit plunged 32% yoy, but after taking out various FX translation effect and other one-off items, 3Q14 core profit rose 17% yoy and 45% qoq. Despite cost pressures, its overall gross margin was stable at 34%. The 3Q14 results are the strongest in 9MFY14. The reported unrealised forex loss in 9MFY14 is S$11.9m.
Hope and despair
We think that its crane rental division is still seeing decent business through its participation in large infrastructure projects. In reality, the completion of major projects in Malaysia and Papua New Guinea as well as the weak economy and slowdown in the resources sector in Australia are expected to seriously weigh on the group's performance in the next two quarters. The tower crane rental division remains the bright spot, with a strong base of ongoing projects and new opportunities in various sectors arising from increasing urbanisation in China.
Near-term challenges in Australia suggest that its operation there is not out of the woods yet. The operating environment is hindering the spectacular growth that had lifted the group's performance in the past. That said, the stock has probably reached the bottom end of its valuation band and this could act as a downside cushion. We maintain our Hold rating.
Publish date: 14/02/14